If you're saving for a deposit with the aim of avoiding Lenders Mortgage Insurance (or LMI), you might be surprised to learn that 20% of the purchase price might just not be quite enough.
That is because fees and charges (such as stamp duty, lenders establishment fees, settlement agent fees, and mortgage registration fees) apply and need to be added to your deposit if you want to avoid mortgage insurance.
In fact you will need more than 20%.
Let me explain with an example. Let’s assume that you're looking to purchase a property for $500,000 and you've managed to save $100,000 (20% of the purchase price) for your deposit in the hope of avoiding LMI.
The reality is that you will actually need more like $119,875 to avoid LMI.
Let's look at why with some numbers first. I'll then explain how lenders look at them and, finally, reveal how much deposit you really need if you want to buy a $500,000 property and not pay mortgage insurance.
Purchase price: $500,000
Fees and charges:
- Stamp duty (WA): $17,765
- Settlement agent fees: $1,100
- Application fee: $600
- Mortgage registratoin: $160
- Transfer registration: $250
Total fees and charges: $19,875
Total required: $519,875 (purchase price + fees & charges)
Your deposit: $100,000
Total loan amount required: $419,875 (total required - your deposit)
How lenders determine if mortgage insurance is payable
Lenders divide the 'total loan amount required' (in our example, $419,875) by the property's purchase price (i.e. $500,000).
The result is what is known in the home loan industry as the Loan to Value Ratio (or LVR). In our example, the LVR in our example is 83.98% ($419,875/$500,000).
And because it is above the magical 80% mark... would need to be paid - and would cost you between $3,500 to $4,100, depending on the lender you choose.
To avoid LMI... your LVR needs to be 80% or less
For your LVR to be no higher than 80%, you'd need a deposit of at least $119,875, which represents 23.98% of the purchase price.
As you can see... if you want to avoid mortgage insurance your goal should be to save about 24% of a property's and not the widely believed 20%.
If you're a first home buyer in WA, you'd still need an extra $12,543 on top of your $100,000 savings to avoid mortgage insurance. It is slightly less because, in our example, as first home buyer you'd benefit from a discount of $4,333 on the stamp duty and an additional $3,000 in deposit from the First Home Owners' Grant (in WA).
Call us if you're not sure how much deposit you need
So when looking at your options and deciding on a savings plan... don't forget the applicable fees and charges. These will vary depending, among others, on whether you're a first home buyer, where you're buying your property, and what lender and home loan product you ultimately choose.
If you want an estimate of what these fees and charges would be, and what deposit you need to avoid LMI - call me today!
If you want to book an appointment or are just interested in having a chat, feel free to either call Jason Coviello on 0438 211 745, or send through any questions via email to firstname.lastname@example.org
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